[Income Tax Debate] Tax Bracket Unchanged for 15 Years Despite 31% Inflation Increase... "Effectively an Automatic Tax Hike"

Why Income Tax Reform Is Necessary
Inflation Rate and Minimum Wage Increase Not Reflected
Reducing Tax Burden for Middle and Lower Income Classes... Likely Raising the Threshold to Below 88 Million Won

[Asia Economy Sejong=Reporters Kwon Haeyoung and Son Seonhee] The government has decided to reform the earned income tax to reduce the tax burden on the middle class and is considering adjusting the tax brackets for the first time in 15 years. Although prices have risen by more than 30% since the current income tax system was established in 2008, the tax brackets and rates have remained unchanged, leading to ongoing criticism that the government is implementing a "silent tax increase." While a comprehensive reform of the income tax system is necessary considering inflation, it is expected that the government will propose an income tax reform plan targeting the middle class and lower-income groups struggling with soaring prices and interest rates, taking into account the possibility of reigniting controversy over "tax cuts for the rich" during the MB (former President Lee Myung-bak) administration and fiscal soundness.

◆Tax brackets unchanged despite 2.5 times minimum wage increase＝According to the Ministry of Economy and Finance on the 14th, revenue from earned income tax, a major source of national tax, increased more than threefold from 15.6 trillion won in 2008 to 47.2 trillion won in 2021. The government has explained this increase as resulting from job growth and tax hikes on high-income earners, but a significant part is due to collecting more taxes on the increased incomes of salaried workers over 15 years amid rising prices.

The current earned income tax brackets for incomes "below 88 million won" were set during the 2008 reform. Although higher tax brackets with increased rates were added to tax high-income earners, the brackets for the lower and middle classes earning below 88 million won have remained unchanged for 15 years, and the tax rates were slightly reduced by 2 percentage points in 2009. While the domestic consumer price index rose by 31.7% compared to June 2008, the government kept the income tax brackets and rates unchanged, effectively resulting in an automatic tax increase on the lower and middle classes.

The current income tax brackets do not reflect the increase in the minimum wage. In 2008, the minimum wage was 3,770 won per hour, which translates to an annual salary of 9.45 million won, below the lowest tax bracket threshold of 12 million won at that time. Fifteen years later, in 2023, the minimum wage is 9,620 won per hour, equivalent to an annual salary of 24.15 million won. While the minimum wage increased more than 2.5 times, the tax brackets remained unchanged, resulting in an overall increase in the effective tax rate. Although most minimum wage earners are exempt from taxes due to various deductions, middle-income earners with taxable income around 46 million won have effectively experienced a tax increase.

◆Focus on raising tax brackets below 88 million won＝With soaring prices and economic instability, the Ministry of Economy and Finance is expected to include a plan to raise income tax brackets in the tax law revision to be announced on the 21st. President Yoon Seok-yeol’s directive during the Ministry’s work report to reduce the tax burden on the middle and lower classes has strengthened the possibility of income tax reform for the first time in 15 years. Additionally, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho’s request to businesses to minimize wage increases due to concerns about wage-driven inflation has fueled dissatisfaction among salaried workers with the current income tax system.

If the government adjusts the income tax brackets, it is expected to revise the brackets below 88 million won, where the lower and middle classes are concentrated, as President Yoon has urged tax relief for these groups. Although it would be reasonable to adjust other brackets considering inflation, the government is unlikely to touch brackets above 150 million won, which are considered high-income, due to concerns about reduced tax revenue and criticism of tax cuts for the wealthy.

Previously, the Lee Myung-bak administration also attempted to reduce income tax but retreated amid controversy over "tax cuts for the rich." In its first year in 2008, the administration planned to uniformly reduce tax rates by 2 percentage points across all four income brackets from 8-35% to 6-33%. However, the implementation for the highest income bracket above 88 million won was postponed twice and eventually abandoned due to the stigma of "tax cuts for the rich," which even the ruling party found burdensome.

◆Concerns over excessive tax exemptions despite "earning but paying zero tax?"＝However, the government is very negative about increasing the number of tax-exempt earners. As of 2020, out of 19.5 million earned income earners, 7.26 million (37.2%) were exempt from tax. This means a disproportionately high number of people effectively pay no tax despite earning income due to various income and tax deductions. Meanwhile, only 11.2% of taxpayers report taxable income exceeding 46 million won, but they bear 76.2% of the total tax burden. Because the highest tax bracket threshold is high and the proportion of tax-exempt earners is excessive, the effective tax rate reflecting the overall income tax burden is actually lower compared to advanced countries. According to the National Assembly Budget Office, Korea’s effective income tax rate was 6.0% in 2020, less than half the OECD average of 15.1%.

Furthermore, with the new government’s launch under the slogan of "fiscal normalization" and efforts to strengthen fiscal soundness, the issue becomes more complex. As of last year, income tax accounted for 33.2% of total national tax revenue (344.1 trillion won), making it the largest contributor among all tax categories and a central source of government revenue. Raising income tax brackets inevitably leads to reduced tax revenue. A Ministry of Economy and Finance official said, "It is true that the tax brackets have not changed for 15 years, but it is also necessary to consider that various income and tax deductions and government welfare expenditures have increased during that period."